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Many people preach the dangers of having a credit card, telling young people to stay away from them entirely. In reality, credit is very beneficial when used in the right ways. A good credit score helps you to qualify for important loans such as a mortgage on a home. Higher credit can also get you better interest rates for any loans you take out.
Credit Tips to Build a Good Score
Using a credit card is one of the best ways to build your credit, especially if you’re just starting out. This guide will help you ease into the world of credit so all of your earliest decisions are good ones:
Start Small
When looking to build your credit for the first time, it’s best to start slowly. If you bite off more than you can chew, you may end up hurting your credit score. Instead of taking out a loan for a brand new car, start with a secured credit card.
This is where you learn that credit cards aren’t all that bad. You can use them to make purchases using credit and the amount charged won’t be owed immediately. Then you’ll make payments on your credit card to pay back what you’ve spent. If you don’t pay off your balance in full, you’ll also have to pay interest. This is where most people get stuck in a vicious cycle.
Secured credit cards typically require a deposit to be made before opening a line of credit. This deposit reduces the risk for creditors and can be used to pay off your balance if needed. You’ll also learn to use your credit sparingly and make timely payments to build your credit and avoid penalties.
Set Up Autopay
Just like many bills today, you can set up an autopay feature with most of your credit cards. Enable this feature to automatically pay off your balances before they’re due. This significantly lowers your risk of accruing costly interest rates or late penalties.
The only thing you need to stay on top of is your bank account balance. This is where your credit card will pull funds from to clear its balance. As long as enough cash is available during an autopay cycle, you won’t have to worry about a thing.
Never Max Out Your Available Credit
As you start building your credit, you might be granted larger lines that allow for greater spending. It will be tempting to use this as an excuse to spend more. Maxing out your credit cards is a bad habit and can make it difficult to pay your balance in full. Using your entire credit line also hurts your credit score, even if you do pay it off on time.
This is due to your credit utilization ratio, a simple calculation of how much credit you’re using at any one time. If you have a high utilization rate, you’ll be viewed as a riskier borrower and your credit may be lowered.
Many financial experts will recommend you remain in the ballpark of 30% or less for your credit utilization ratio. This means for every $10 of credit you have, only use a maximum of $3. If you’re only using your credit card to build your credit, you shouldn’t need more.
Review Your Statements
Even though financial technology has automated almost everything, mistakes can still be made. Some of these mistakes won’t be your fault, but it will be your responsibility to discover and dispute them. The best way to do this is by reviewing your monthly credit statements.
Your credit card likely has a mobile app or website where you can easily access your statements and payment history. If you spot something that doesn’t line up with your personal records, contact a customer service representative. More often than not, you can resolve the problem quickly.
Reviewing your statements will also help you detect the earliest signs of credit card fraud. The earlier you detect fraudulent use of your money and information, the faster you can make a recovery. Always be careful where and with whom you share credit card information to keep your risk of fraudulent activity low.
Be Slow to Cancel
One day you’ll move on from your first credit card to one with greater benefits and a larger credit line. But don’t be so quick to cancel your old credit card when this occurs. In fact, many experts will tell you not to cancel it at all.
Keeping the account open will help improve your length of credit. This is another factor in credit score calculations. Your first credit card can boost your score simply due to the amount of time you’ve had it.
There may come a time when you do want to cancel a credit card. For example, some cards come with annual fees. If you’re not using a card but continuing to pay the fees, it might be worth considering a cancellation. Just be sure to research how it will affect your credit score. Consulting with a financial guide can give you insight into how that calculation may be affected.
Many factors go into building good credit, but it doesn’t have to be so complicated. All you have to do is make every financial decision with some thought and proper intentions. Your credit score will reflect the efforts you make.
